One of the developers of McKinsey’s “Ten Timeless Tests of Strategy,” Chris has worked on strategic transformations for organisations across Australia’s retail, mining, transportation, consumer-goods, and telecommunications sectors

January 18, 2018Peter Drucker famously said that “culture eats strategy for breakfast.” Nowhere is that more evident than in meetings to decide corporate strategies. In those rooms, egos and competing agendas, biases and social games reign. That’s because strategy isn’t the only thing at stake. Jobs - even careers - are on the line.

The budget process intrudes, too. You may be discussing a five-year strategy, but everyone knows that what really matters is getting a “yes” to the first-year budget. The outcome of all these dynamics is the Hockey stick projection, confidently showing future success after a dip to account for first-year spending—a bold forecast that, more often than not, fails to materialize.

A few years back, the former CEO of a major Las Vegas casino operator told my colleagues and me that he wished just once an executive would say to him, “Man, things are not well down here, and, to tell you the truth, I can’t tell which way is up. I really have no idea why things are heading south - but we are on it, rolling up our sleeves to turn this sucker around.”

Why is this social side of strategy so pervasive? Because strategy development poses exactly the kind of problems for which the human brain is least adapted. People are prone to many well-documented unconscious cognitive biases that exist to help us filter information in day-to-day decision-making. But these unintentional mental shortcuts can distort the outcomes when we are forced to make big, consequential decisions, infrequently, and under high uncertainty - precisely the type that we confront in the strategy room. Even the most seasoned executives have only limited experience and pattern recognition in these situations. Trying to improve your strategic decisions is like working on your golf game by practicing blindfolded, and not finding out if your ball went into the hole for three years.

Before you can tackle the social side of strategy, you need to know what to look for.

START WITH THE COGNITIVE BIASES…

There are many well-documented biases, but these are among the most dangerous in the strategy room.

Overconfidence:

Experts become more confident as they gather more data—even though the additional data might not make their projections any more accurate. Overconfidence is self-reinforcing, too. It leads people to ignore contradictory information, which makes them more confident, which makes them more likely to ignore contradictory information. We convince ourselves that we have a winning strategy this year even though we continue doing pretty much what we’ve always done.

Confirmation bias:

When you bring together a bunch of people with shared experiences and goals, they typically wind up telling themselves stories, generally favorable ones. One study found, for instance, that 80% of executives believe that their product stands out against the competition—but only 8% of customers agree.

Survival bias:

This is one to which the strategy processes is particularly prone, because we only see what happened, not what didn’t happen. We can precisely measure the behavior of the customers we have, but what about the silent voices of the customers we don’t have?

Attribution bias:

This one often kicks in when a target is missed, with blame piled on the most convenient cause available, usually some one-off event—unseasonable weather, an IT outage, etc.—even though such one-off occurrences seem to happen every year. With failure dismissed as an externality, the management team closes ranks and decides to double down and re-establish the goal. “We lost a year, but we’re going to get back on track.”

…THEN ADD THE SOCIAL DYNAMICS

As hard as it might be to overcome those individual biases, agency problems are the real torpedoes to strategies. They’re fueled by the reality that managers act in their own interest, not purely in that of the enterprise. Do these sound familiar?

Sandbagging:

“I’m only going to agree to a plan that I know for sure I can deliver. My reputation is on the line, and I can’t risk being the one division that misses budget.” Individuals will often have a different attitude to risk than their overall enterprise does.

The short game:

“Someone else will be running this division in three years, anyway. I just need to milk performance for the next couple of years, get a good bonus and the next promotion—or maybe get poached by our competitor.” The motivations of the executive are not automatically aligned with those of the owners.

My way or your problem:

“I know this business and industry better than the CEO and better than the board. They’ll just have to believe what I tell them. If I don’t get the resources I ask for, then there’s my excuse for not delivering.” The line executive has inside knowledge, and often the CEO and board have little choice but to accept their version of the truth. Market share can be defined favorably by excluding geographies or segments where the presenter’s business unit is weak.

I am my numbers:

“I get judged by my numbers, not by how I spend my time. I’m just going to work hard enough to hit my targets, but not a lot more.” One’s supervisor can’t directly observe the quality of effort, and results can be noisy signals. Were those poor results a noble failure? Were those great results dumb luck?

No matter the precise motivation, executives will use every bit of social power to improve the chances of their business succeeding. So how do you overcome these strategy room dynamics? You need an objective benchmark against which to measure a proposed strategy’s chances of success.

In my upcoming blogs I will lay out a way to establish just such a benchmark.

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